Abstract
This chapter explores the avenues that supervisors use to achieve outcomes with regulated institutions, in particular banking organisations, based on experience at the Australian Prudential Regulation Authority (APRA). Issues discussed include: the theory of regulatory interaction, the rationale for supervisory intervention, institutional incentives, modes of engagement, why do supervisors fail to assert their influence?, and how can supervisors be more influential?
The views expressed are those of the author and do not necessarily reflect those of the Australian Prudential Regulation Authority. The author thanks David Lewis for helpful suggestions on an earlier draft.
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Notes
- 1.
Extract (abridged) from Palmer (2002), p. 140.
- 2.
APRA was created in 1998, after a Government enquiry into the banking system recommended that an independent agency take over bank supervision functions historically held by the central bank and other sectoral regulators.
- 3.
Senior Supervisors Group, ‘Risk Management Lessons from the Global Banking Crisis of 2008’, October 2009.
- 4.
Report of the HIH Royal Commission, recommendation 26.
- 5.
Regulatory capture theory was originally established in Stigler (1971).
- 6.
- 7.
- 8.
Basel Committee on Banking Supervision, Report to G20 Leaders on Basel III Implementation, Bank for International Settlements, June 2012 (available at www.bis.org).
- 9.
In fact, Ayers and Braithwaite (1992) note that lower-level staff may occasionally ‘tip off’ regulators to areas of potential concern.
- 10.
Financial Stability Forum (now Financial Stability Board), FSF Principles for Sound Compensation Practices, 2 April 2009, available at http://www.financialstabilityboard.org/publications/r_0904b.pdf.
- 11.
APRA does not use resident supervisors, that is, supervisors stationed at the regulated institution on an ongoing basis.
- 12.
APRA Letter to all ADIs, ‘Outsourcing and offshoring: specific considerations when using cloud computing services’, 15 November 2010 (available at www.apra.gov.au).
- 13.
Capital requirements for specialised lending are found in APRA prudential standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, January 2008 p. 50 and Attachment F.
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Richards, H. (2013). Influence and Incentives in Financial Institution Supervision. In: Kellermann, A., de Haan, J., de Vries, F. (eds) Financial Supervision in the 21st Century. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-36733-5_5
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